Auto Service World
Feature   February 1, 2000   by Robert Wm Greenwood

How a budget can improve business

A well-prepared budget or operating plan is the best source for management to get an indication of the financial health for an automotive repair business.Independent shops must think this process thro...

A well-prepared budget or operating plan is the best source for management to get an indication of the financial health for an automotive repair business.

Independent shops must think this process through to gain full value, rather than run their business operation based on ‘just more sales, please’ concept every day. A daily predetermined dollar objective for each revenue category of the shop makes more sense.

The shop operating without a plan does not know whether they had a good day or a bad day.

They just hope they sell more than yesterday.

They run their business by their bank account balance.

When the bank account is up, they ‘feel real good’, and when it is down, after paying all the monthly bills, they ‘feel real bad’.

A proper budgeting plan does not have to be an overly complicated affair to prepare. Yet when put in place, it will show a projection of both revenue and expenses for each department in the automotive repair shop for a set planning period.

These plans can be used as controls, in that they offer targets against which performance of the business can be measured as time passes.

A budget can demonstrate the health of a shop to accountants, lenders and potential investors.

A well thought out budget plan can also function as a kind of crystal ball to predict the future, in that it allows the owner or manager to predict the consequences of future events such as price increases on the shop.

The first step is to sit down and really determine what kind of realistic take home income is needed to live and support the lifestyle you desire.

Once you have the take-home amount determined, you can contact your accountant to have him or her calculate what the ‘grossed up’ amount should be to take into account personal income tax.

In the example I am going to work with I am going to use a gross monthly wage amount of $6,250 for the owner.

Next, add to this amount all monthly business principle loan payments required, as well as an estimate for monthly business corporate income tax to allow for prepayment of taxes.

For example, I will use $250 per month as a principle bank loan payment and $200 per month as a prepayment of corporate income tax.

The personal amount of $6,250 + $250 + $200 add up to $6,700 per month. We call this amount the ‘total corporate profit demand’ that is required each month from the shop.

The next step is to factor in an additional amount as profit for the shop. In my example, I am going to choose $3,000 per month as additional profit I want the shop to make after I have been paid my management salary, paid my principle bank loan payment and prepaid some corporate income tax..

This means that the total net profit goal for the shop will become $9,700. ($6,700 + $3,000 = $9,700.

Out of the $9,700 I will pay myself a $6,250 salary, pay my principle payment on my bank loan ($250), and prepay $200 to the government for company income tax, leaving the shop with a $3,000 cash flow profit.

Now for the next step; to create an average operating expense budget.

To keep it simple, take last years’ financial statement, divide every expense category by 12 and adjust for any inflationary amounts or changes required.

Remember that you have accounted for management wages in the previous numbers, so only work with staff wages when calculating the monthly wage amount.

Now you have a detailed monthly expense budget for this year by every expense category.

The objective is to live within the budget over the course of the year, realizing that in some months, operating expenses are higher and in others it is much lower.

Prepare a total of all the expense categories, which will represent the total monthly operating dollar expenses for the shop.

For my example I am going to use a total operating expense budget of $26,800 per month which includes all staff wages, rent, shop supplies, bank loan interest, utilities, vehicle operation and all other operating expenses to make the shop work.

Now I add this amount, $26,800, to my net profit goal of $9,700, and I come up with $36,500.

This total amount is called the gross profit demand.

It represents the total profit the shop has to make from all sales including labour before it pays out any operating expenses, management wages, bank loan principle payments or prepays any business corporate taxes.

Note: If you sell gasoline, subtract the monthly gross profit made from gas from the gross profit demand number in order to determine a service bay sales.

Next, determine what the total gross profit percent is currently in the business, or what it was last year in the business operation.

This can be done by looking at your financial statement and taking the total dollar gross profit number made for the year and dividing it by the total dollar sales number for the year.

If your accountant puts wages as a cost of labour sales, ask him or her to calculate total gross profit percentage of the shop with wages taken out of cost of goods sold.

Note: Once again, make sure you take out the gasoline dollar sales and the gasoline dollar gross profit amount, because we want to determine what sales are required to be produced out of the bays.

In my example I am going to use 60% as my total gross profit percentage earned in the bay operation.

Note: This percentage includes total labour revenue of the shop. In a well managed operation one should realize a minimum of 65%, but preferably 70% total gross profit from the bays.

Next, take the ‘gross profit demand’ and divide it by the total gross profit percentage of the shop. In my example, we take $36,500 and divide it by 60% which equals $60,833.

This dollar amount represents the total retail dollar sales that must be achieved in the business each month.

Next, take the total retail dollar sales required each month and divide it by the average number of days the business operates in a month.

For example, $60,833 divided by 22 days opened per month equals $2,765.13 per day. This number represents what the shop wants to sell each day in total retail sales.

This daily number should be further broken down into oil, tires, batteries, aftermarket parts, dealer parts, maintenance labour and diagnostic labour.

This can be done by knowing your average sales mix percentage in every revenue category of your shop and multiplying the total sales required by the sales mix percentage.

This is a simplified way of calculating what you want to average in sales each and every business day.

Knowing at least this average number definitely gives you a sense as to whether you had a good day or a bad day.

If bay sales generate $2,765.13 in each of the 22 days the shop is opened ($60,833 per month), at a total of 60% gross profit (including labour), and the shop lives within the operating budget set, then management will enjoy a professional income, meet all its other commitments with bank and government, and have net profit left over to assist in growing the business.

Do not be intimidated by looking at the financial numbers of your shop. Slow down, get familiar with them and work with them.

Breaking the numbers down into daily sales objectives by revenue category can allow you to realize your profit dreams.

You will also realize how close you really are to meeting the numbers required that will change your life. SSGM

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